Strong Economy Slowed by Energy Prices

Strong Economy Slowed by Energy Prices

Article excerpt

CRUDE OIL PRICES AVERAGED $31 per barrel in 2003 and began 2004 at $29. On Oct. 15, crude closed just shy of $55--a 90% rise so far this year. Spot gasoline prices have risen 56%. The increase in oil prices has undoubtedly had a depressing effect on economic growth in 2004. Fortunately, the oil price increase comes at a time when the economy has some momentum.

Many factors have conspired to drive oil prices higher this year. Among them: the war in Iraq, terrorism in Spain and Saudi Arabia and threats of terrorism elsewhere, strong global demand--particularly from Asia and the U.S., political uncertainty surrounding Russian oil producers, downward adjustments in reserve estimates, a paucity of discovery and growing depletion rates, low levels of new investment, and high capacity utilization levels which leave little room for error.

One of the chief concerns surrounding the run-up of oil prices so far this year is that at least two of the five recessions that have occurred since the early '70s have coincided with rapid increases in the price of oil--so called "oil shocks." But both the 1973 and 1980 oil shocks were very different from the current situation. In both of those cases OPEC suppliers raised the price of oil, while the current situation has an abundance of convergent causes. To the extent that strong demand is at least partly responsible for the current oil price run-up it is not cause for undue concern.

The '73 and '80 oil shocks also entailed large and rapid price increases. The 90% rise in crude prices so far in 2004 is still smaller than in both of those prior instances. …